Johnson unlikely to get early election: What the City is saying

Prime minister Boris Johnson calls for election after suffering major blow to his plans for an October 31 Brexit

Boris Johnson, UK prime minister
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FN Staff

September 4, 2019 11:17 am GMT

The UK government’s latest push for an early general election looked set to founder in parliament on September 9, after the opposition Labour Party confirmed it will not back the move.

A week of tumult in British politics has left the Brexit policy of Prime Minister Boris Johnson in tatters. On September 4, MPs approved a bill that would force him to request another extension to the current October 31 Brexit deadline against his will; the bill is expected to become law on Monday.

Johnson responded to Wednesday’s vote by immediately calling for a general election on October 15 as a means of breaking the impasse on Brexit; but this requires a two-thirds majority in Parliament.

Labour declined to vote for an early poll in a government motion put to Parliament on Wednesday, and speaking on the BBC’s flagship Today Programme on Friday morning, shadow foreign secretary Emily Thornberry confirmed it would do so again on Monday. Labour, and other opposition parties, are expected to back a poll only once an extension past October 31 is secured.

The latest developments come after Johnson risked a party split by expelling 21 Conservative MPs for voting in favour of the delay bill, including former chancellor Philip Hammond and Father of the House Kenneth Clarke.

On Thursday, universities minister Jo Johnson — younger brother of the prime minister — resigned from the government, citing a conflict between his family loyalties and the national interest.

The British pound has rallied strongly this week as Parliament has moved to place obstacles in the way of a no-deal Brexit; up around 2% for the week against the US dollar, as of 13:15 BST on Friday, at $1.2305.

With Johnson’s government having lost its majority, and parliament’s rebels sticking to their guns, an autumn general election remains highly likely, though its timing is uncertain.

Here, we round up the reaction from City commentators to what has been one of the most crucial and game-changing weeks in the Brexit saga.

Mark Dowding, chief investment officer at BlueBay Asset Management Although there is much uncertainty and fluidity in the situation, we are inclined to believe that the Brexit deadline may need to be moved until the end of 2019. This could see an election in November, fought on the basis of the Tory and Brexit parties campaigning for a hard leave and the rest of the parties in a de facto alliance.

Currently, many assume that the Tories would be the overwhelming favourites to win such a vote. However, we believe that the outcome is too close to call given regional variations, which could see the Conservatives lose seats to the SNP in Scotland and to the Liberals in London, the South East and South West. The result could deliver a Labour/Liberal/SNP coalition seeking a second referendum and a potential cancellation of Brexit altogether.

Thomas Clarke, portfolio manager of the Dynamic Allocation Strategy, William Blair The British pound is a fundamentally undervalued currency against many others... but since 24th May 2019 we have fully neutralised what was previously a long exposure due to the risks posed by Brexit. Currently it appears that the UK parliament may successfully avert no deal and compel another delay, though this is likely to result in a snap general election.

A successful withdrawal agreement reached with the EU... is a relatively low probability at this point, hence we see the near term risks to the GBP as mostly negative. Therefore, we continue to refrain from taking long exposure to this otherwise fundamentally attractive currency.

Elliot Hentov, head of policy research, State Street Global Advisors Above all, the greatest downside risk is the possibility of a general election being called before 31 October... an emerging consensus is coalescing around our base case that we have had in place for months, which is that an election will follow an extension [of the Brexit deadline].

A narrow Johnson victory and a Corbyn-SNP government would be the two least favourite outcomes. A Johnson landslide could actually open new possibilities for a smooth EU exit, so would be marginally preferable. Another hung parliament would prolong the uncertainty and deepen the slowdown. Only a cross-party alliance that can manage to settle the Brexit question without a massive policy swing would be supportive of sterling and UK asset prices more generally.

Edward Park, deputy chief investment officer, Brooks Macdonald It is still likely that we will get a general election before the year is out. ‘Do or die’ has become the key phrase linked to PM Johnson’s Brexit position but it is not a strategy we would recommend for asset allocation. As a result, we maintain our existing underweight position to the UK... until Brexit and political risks have moderated, it is likely that international asset allocators will continue to shun UK exposures.

Charles Hepworth, investment director, GAMClearly an election is down the pipe, but it is dependent on timing... to put your money one way or the other on a definitive outcome is a fool’s errand at the moment. We are seeing major investment banks saying, ‘Avoid the UK like the plague’, as it’s turning into an emerging-market currency virtually on volatility. UK equities have lagged the rest of the world. I don’t see a Corbyn government as likely. It would clearly spook the City and currency markets as well as UK companies that will have the lingering threat of renationalisation.

Christian Schulz, economist, CitigroupA year ago, a Labour government would have been a big economic downside risk... [this] has not changed, but Labour has become more decisively pro-EU over the past 12 months. Staying in the single market and the likely reliance on partners such as Liberal Democrats would limit Corbyn’s leeway for anti-business policies... The alternative, a fiscally profligate no-deal Conservative government, is no longer as enticing.

Savvas Savouri, economist, ToscafundThe pound is blissfully performing as if nothing has happened, and we are not in a political crisis. Or maybe, just maybe, it is saying the UK economy is largely immune to politics. Those of us who remember the ineffectual and divided [John] Major government... will remember that the economy did rather well despite it, helped by the pound’s weakness after we were unceremoniously marched out of the ERM. The economy will deal with this fiasco as it has with previous ones: it will keep calm and carry on.

Oliver Harvey, macro strategist, Deutsche BankSome market participants have expressed concerns that the election of Labour leader Corbyn as prime minister could be negative for UK asset prices, particularly sterling. We believe that these fears may be overstated... we see the magnitude of economic damage caused by a no-deal Brexit as much higher than policies proposed in the last Labour manifesto.

Stéphane Boujnah, chief executive, EuronextIn practical terms, Brexit has already happened in the financial sector. Like any market infrastructure in Europe, we hope for the best and plan for the worst. In planning for the worst, we have made arrangements with all our clients... as far as our clients are concerned, Brexit has already happened because they have already started to use the platforms that were ready for the 1st April.

Dean Turner, economist, UBS Wealth ManagementAt this stage, we are doubtful that lawmakers will grant the government its wish [for a quick general election]; instead, they will likely look to hold an election after the Brexit deadline has been extended. Our base case remains that an extension to the Article 50 deadline and a general election will occur before the final decision on Brexit. If, as we expect, the October 31 deadline is extended, the pound could recover some of its recent weakness.

Alex McDonald, CEO of the European Venues and Intermediaries Association and the London Energy Brokers’ AssociationThe situation remains as it was in Q1. Hope for the best and prepare for the worst – the worst being the absence of a mutual equivalence determination under a no-deal Brexit. Therefore, EVIA and LEBA members are continuing to offer EU-shored MiFID trading venues to clients requiring these facilities in addition to their pre-existing trading venues around the world. The threat to fragmented liquidity pools remains.

Richard Buxton, head of UK equities, Merian Global InvestorsNet net, I think it is difficult to see any party having an overall majority, so we face another hung parliament. Presumably a Tory-led minority would pursue Brexit, though still unlikely to get Parliament to agree to a no deal exit. A Labour-led coalition would call a second referendum — the outcome of which is by no means clear… I suspect a Labour-led coalition would not be able to be as full-on socialist as it might wish, so we will have to wait and see which aspects of its agenda are acceptable to its partners.

Leigh Himsworth, portfolio manager, Fidelity InternationalWhat we’re seeing at the moment is a culmination of problems that were created by Theresa May’s snap election trying to get a majority herself, which backfired. We are paying the consequences for that now in that the executive of government cannot do anything having lost its majority. There is a better chance that we get a deal. But also the chance of a delay has risen. For me to say what will happen with any certainty is just guess work.

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